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How to invest in gold ETF, Mutual funds in India, Investment avenues for NRI

July 2009 |

Possessing gold has been a mark of prestige ever since it was discovered. But now, it has gradually turned into an important asset for investors. Individuals who are looking to diversify their portfolio and want to hedge their overall wealth, gold is the most suitable and preferred asset.

Portfolio diversification is dispersing one’s wealth into different asset class like cash, debt, equity, property, gold, art and so on. These asset classes have a certain return expectations and risk attached to it.

Portfolio style’s: The composition of various equity portfolio may differ across the category of stocks, e.g. for some portfolio, the investment universe may be restricted or focused on large cap or may be mid caps, small caps or a combination of the three. To add further, there are specialty stocks or thematic stocks, which are named as the thematic funds or one industry specific fund.

Therefore, a complete personal financial plan should take into account the investment horizon, return expectations and risk profile of an investor before executing on any asset class or while selecting the asset classes to diversify the complete asset allocation matrix of any individual personal wealth.

One needs to look at gold as an essential part of your total wealth. It has been observed that in most instances gold tends to pick up when the other asset particularly equity goes south wards. A little allocation in gold provides support to your overall wealth as the quantum of loss is narrowed down due to your provision in gold. Gold is also named as insurance of your complete asset allocation as it covers the risk of complete erosion due to excess allocation towards one asset class.

Why Gold?

Some reasons are discussed below to throw more light on this asset class to make you further informed.

Inflation: Gold is a hedge against inflation. If stocks give good returns, debt products give predictable low returns. Gold’s role is to protect your money against inflation or a continuous rise in prices year after year.

Diversification: A good portfolio is the one that has assets that don’t move up and down together. Gold does not move in tandem with either stocks or debt products. So, we reduce the risk of your investment portfolio by adding gold to it. What this means is that by adding gold to your portfolio at the same risk level, you get a higher return on the total wealth.

Liquidity/Emergency: Gold acts as emergency money. Imagine if you are laid off and are looking at a three to six months period before your get another one job, how you would pay your EMI’s and other expenses or a short term liabilities. If the markets are down to sell now could book a huge loss. If you have gold in your portfolio you can quickly liquidate the gold and raise cash, which you can use to tide over such emergencies. Gold has been able to buy the same basket of goods and services over 400 years. What your great grandmother could buy with one gram of gold, you still can, but we can’t say the same for a 100 Rupees in the same period.

Although with the help of a competent Financial Planner, you must plan you personal financial issues in such a manner that such tough times are supported by your debt planning on short term cash management.

How much gold one should have?

Essentially, 5 to 10% of anybody’s portfolio should comprise of gold, which would help into diversification and could increase this composition during inflationary times, maximum at 10%.

What to buy?

There are several forms in which you can buy gold. While gold bricks from banks and jewelry might be most tempting, I recommend that you buy gold in one form, i.e. Gold ETF.

What is gold ETF?

These are exchange traded funds from mutual fund houses. These funds mirror gold prices closely. They are very much like your open ended mutual funds. Gold ETF Funds take your money and buy physical gold and they break the value into units. One unit of the gold equals one gram of gold, for example. Units can be traded in the Stock Exchanges just like shares.

But why Gold ETF?

You should opt for Gold ETF because they are cheaper to buy, hold and sell.

Safer: As you don’t have to worry about where to store the physical gold to a safe place. May be a bank locker for which you also end up paying a rent annually. Small units can be bought, minimum amount is just one unit i.e. one gram, so if gold is 15,000 Rupees per Tola, you can buy as little as of 1500 Rupees a unit of gold ETF.

More liquid: You could buy and sell the units in gold ETF during market hours every day. This makes this option highly liquid in the hands of investor.

Cost of holding gold: There are three kinds of costs to look at, when you buy a financial product. Gold ETFs are better than bars or jewelry, on all three accounts: While buying gold, the maximum you will pay is 1.5 to 2.25% as an entry ticket in gold ETF. It can be as little as 40 to 60 basic points if you buy straight from NSE broker. Gold bars costs 10 to 20% of the price of gold and jewelry has making charges of 15 to 20% as well.

Maintenance cost: ETFs charge 0.5 to 1% only each year, whereas the cost of insurance of jewelry and the rental charges of the bank locker could be much higher.

Selling cost: Brokerage is of just 60 basic points to 1% in the ETF; exit is difficult from bars, because Banks don’t buy it back, so you lose the premium. For jewelers, they too charge near to 30% when you go to sell it. So, the clear evidence points towards including gold ETF in your portfolio.